Australian investors appear to have cooled on some of the nation's high-yielding dividend stocks following the Reserve Bank of Australia's decision to leave the official cash rate unchanged.
While most analysts had expected the central bank to slash interest rates by another 25 basis points, following on from February's cut, the RBA elected to leave rates unchanged at 2.25 per cent. The local market was immediately thrown into a frenzy as investors frantically adjusted their portfolios accordingly.
But companies such as Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Telstra Corporation Ltd (ASX: TLS) have been unable to recover their losses in the time since. Commonwealth Bank and Westpac are down 1.2% and 1% respectively, while the telecommunications giant has fallen 3%.
The market had bid the three stocks higher in anticipation of the rate cut given their generous dividend yields, but are unwilling to pay as much for them now after the rates were left unchanged.
Should you buy?
Given the likelihood of another one or two interest rate cuts by the end of the year, some investors will be questioning whether this is an opportunity to stock up.
Indeed, Macquarie has a $101 price target on Commonwealth Bank, believing that it (together with Westpac) could climb higher over the next 12 months as it steals some of the limelight in the SME (banking for small and medium-sized enterprises) market from rivals National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).
In reality, all three stocks could climb higher over the next 12 months if interest rates are cut further, but none are presenting as reasonable value today. It seems that their shares have been bid up, based on their dividend yields rather than basic valuation logic, suggesting that they should be avoided by long-term investors.
